If you do some work at home, you’re probably using your home internet connection. Are your monthly internet expenses deductible? Maybe.
The deduction rules depend on your choice of business entity (proprietorship, corporation, or partnership).
Deduction on Schedule C
If you operate your business as a sole proprietorship or as a single-member LLC, you file a Schedule C to report your business income and expenses. As a Schedule C taxpayer, you may deduct ordinary and necessary expenses, which include business-related internet subscription fees.
You can deduct your use of your home internet whether or not you claim the home-office deduction, as follows:
• If you claim the home-office deduction on your Form 1040, the internet expense goes on line 21 (utilities) of IRS Form 8829 as either a direct or an indirect expense.
• If you do not claim the home-office deduction, enter the business portion of your internet expenses as utilities expenses on line 25 of your Schedule C.
Deduction When You Operate as a Corporation
When you operate your business as a corporation, you are an employee of that corporation. Because of the Tax Cuts and Jobs Act (TCJA), the only way for you to reap the benefits of the home internet deduction (or a home office) is to have your corporation reimburse you for the deduction. In the case of a reimbursed employee expense,
• the corporation deducts the expense as a utility expense, and
• you receive the reimbursement as a tax-free reimbursed employee business expense.
Why is the reimbursement method the only way for the corporate owner to get the deduction? The TCJA eliminated the 2018-2025 deduction for miscellaneous itemized expenses. These include unreimbursed employee expenses, such as internet connection fees.
Deduction When You Operate as a Partnership
If you have deductible home internet expenses and/or a home office and operate as a partner in a partnership, you have two ways to get a tax benefit:
1. Deduct the costs as unreimbursed partner expenses (UPE) on your personal return.
2. Or get reimbursed tax-free from your partnership via an accountable plan (think “expense report”).
Substantiating Your Home Internet Expense Deduction
Where business owners can run into trouble with the IRS is in substantiating their internet expense deduction.
You should have no problem showing the total cost for your home internet connection—just total your monthly bills. The problem is in establishing what percentage of the total cost was for business, because only that percentage is deductible.
Ideally, you should keep track of how much time you use your home internet connection for business and how much time for personal use. A simple log or notation on your business calendar or appointment book—indicating approximately how many hours you were online for business each day while working at home—should be sufficient.
Google it and you can find software and apps that will track your internet use.
Instead of tracking your home internet use every day throughout the year, you could use a sampling method such as that permitted for tracking business use of vehicles and other listed property. There is no logical reason the IRS shouldn’t accept such a sampling for internet use.
Got it? The home-office internet deduction is a tax deduction that should be substantiated.
If the corporate form of business appeals to you, feel free to contact me by scheduling a call, or by emailing at [email protected] so we can look at your options to see if we should spend some time on your tax planning.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.